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Wednesday, October 14, 2009

Increase the numerator or decrease the denominator?

Obviously I am not going to win the headline title of the year awards with my obscure effort above. I remain concerned with New Zealand's standings and efforts with regards to its productivity. I am not alone in these concerns. The current National government has the explicit objective of increasing our wealth (and productivity) to being equal again with Australia by 2025. While not always a good measure of prosperity the key statistic used to compare ourselves to the Australians (and others) is GDP per capita. GDP per capita is a measure of production and consumption arrived at by comparing payments to producers (either for production input or direct consumption) to population. New Zealand's GDP per capita isn't particularly bad but neither is it particularly good. And, it is decreasing quite quickly if normalised against other developed economies.

As with any ratio GDP per capita can be influenced in two ways. First by increasing the numerator, increasing GDP. Or, second by reducing the denominator, decreasing population. All public policy efforts are focused on increasing the numerator GDP. My concern is that this is a vain endeavour.

Reviewing the excellent CIA World Factbook (available at www.cia.gov) begins to help illuminate the relative strength of all the world's economies. The Factbook has many useful statistics but also very well written, concise and well considered commentaries.

It soon becomes obvious by comparing various attributes and characteristics what indicates likely success for a country in terms of either high per capita GDP or high growth. High growth is the easiest by far. To be a high growth economy you need to be a developing economy. The global recession is obviously a factor currently but in some ways this reinforces the message. Many developing economies are surging ahead despite the recession. Whereas we have to drop to number 122 (Liechtenstein) on the list to find a western developed economy on the growth table (depending on your definition of developed). Historically this makes sense. All historical economic growth spurts have been driven by the development of economic resources (as opposed to the ongoing consumption of a developed resource).

When it comes to the GDP per capita standings then being a developing economy isn't so handy, which also makes sense because the cumulutive benefit of developing resources must be at a maximum at the point where they are fully developed. Nevertheless, the GDP per capita standings make for interesting observation and the following generalisations can be made.

Being small and opportunist makes for high wealth. Liechtenstein, Bermuda, Jersey, Guernsey and the Cayman Islands are all good examples. Each one has substantial protection and patronage from a powerful neighbour and each one benefits from leveraging the wealth of its powerful neighbours by undercutting them on tax, corporate accountability and/or financial regulation.

Being awash with resources is a big factor, particularly if the resource is oil or natural gas. This factor gets relatively small countries like Qatar, Norway, Kuwait and Brunei near the top and is a major factor for the large lucky colonials Canada and Austalia. Canada also benefits from being both politically and geographically close to a rich and very hungry neighbour.

The final 'natural' factor is found in those economies who have significant economic power from their development history. The United States of America and most Western European nations fall into this category.

Well none of these natural factors work to New Zealand's advantage. New Zealand is too large to be a small opportunist, and this wouldn't sit well with us culturally in any event. We are not awash with resources compared to our population, and we did not have the size to build a huge residual economic heritage through our high development years. If New Zealand is going to seriously increase GDP then it will need one of the new methods.

The knowledge economy is touted as being our strategic saviour but I have my doubts here. The top knowledge economies are the US, Japan, Germany, the UK and France and there is no doubt their economies are held up (to some extent) by their high technology industries. I don't have room to explore the argument in this post but the prerequisites for high technology excellence on any scale is large populations of highly educated people in high density population centres with lots of stake capital. I don't see how New Zealand can compete on the world stage here. We do not have the large populations to allow for the highly educated large centres of urban density and we do not have good access to capital. Even if we did have these attributes in a relative sense we would still be well below the absolute levels needed to be globally competitive. In any event the high technology industries are suffering badly in the global recession and this is a factor affecting even those knowledge economies that were not caught up in the financial credit crunch, such as Japan and Singapore both of which are now trying to diversify. A knowledge economy may not even be the right goal for New Zealand.

The final way then seems to be the way of Iceland and Ireland. At least New Zealand is broadly consistent with the naming format. The two I-lands embraced globalisation with open arms. Nevertheless, in Iceland's case in particular, this was to some extent done by the development of resources (eg Iceland's significant geothermal and hydropower resources). Both countries made it very easy, even very attractive for the big global industries to set up shop. They gave particular ease of access to high technology industries and high technology people and they were the darlings of economists for their reformations. New Zealand has had its own experiences with this globalisation approach, which was a feature of Think Big, but this was a fairly clumsy effort. New Zealanders in general tend to be anti-big business and one does wonder how much sovereignty Iceland and Ireland have foregone in their modernisations. However, most New Zealanders tend to believe that such global businesses are inherently inequitable whereas, interestingly, Ireland is significantly better than New Zealand in the GINI index (the GINI index is a measure of how well income is distributed across the population) and Iceland is a great deal better.

Both Iceland and Ireland have been hit hard by the global recession. Iceland's banking system completely crashed. This is a stern warning against their strategies although, even with significant wealth contraction, their GDP per capita still well exceeds New Zealand's. It is too early to call the I-land experiments a success but it is also too early to call them a failure. I sincerely doubt that New Zealand has the appetite to pursue these strategies in any event.

Our politicians and policy makers are currently clutching at straws when it comes to increasing New Zealand's productivity. I do not advocate that they give up but, as a credible alternative, perhaps we should consider what level of population New Zealand's natural resources can comfortably support. Then, maybe, our immigration policies should reflect this goal rather than continually fuelling consumption driven growth for growth's sake.